Blockchain Contradictions in Energy Service and Climate Markets

Abstract

On paper, blockchain promises near-zero transaction cost for i) the establishment of energy demand baselines; ii) negotiation and execution of energy service contracts; iii) measuring, reporting and verifying of energy service provision relative to contractually agreed baselines; iv) capturing and trading of associated carbon emission reductions; and v) the establishment of appropriate trading platforms. It is also widely assumed that the ‘invisibility’ of both energy service delivery (especially in relation to energy savings) and carbon emission reductions can be overcome through provenance and ‘visibility’ generating capacities inherent in blockchain. Many aspects of energy service delivery and the capturing of associated carbon emission reductions, especially in relation to transaction cost minimization, also fulfil the business case for using blockchain: Use of a database, as the basic purpose of the blockchain is to order and record transactions This database must be shared among multiple users wishing to write to it to commit their own transactions The transactions are independent, i.e., the order of the transaction matters (e.g. the investor must pay money before the borrower pays interest on it) The writers do not trust each other as they may have conflicting interests; or simply have no sufficient information about each other There is a need for disintermediation, i.e. when no third party is suited to act as a trusted intermediary for all writers for one reason or another Aside from fulfilling the theoretical business case, it is important to recognize the scale and scope of blockchain application in the energy sector. These, according to a recent paper by Andoni et al., range from 1) metering/billing and security; 2) cryptocurrencies, tokens and investment; 3) decentralized energy trading; 4) green certificates and carbon trading; 5) grid management; 6) IoT, smart devices, automation and asset management; 7) electric mobility; and 8) general purpose initiatives and consortia. In practice, however, many of these attributes fail to materialize due to lack of scalability from small-scale experiments, data incompatibility and complexity. Many of these issues result from a fundamental misunderstanding of how energy systems operate, especially regarding social/technical/economic components. This paper firstly provides a transaction cost economic analysis which proves blockchain’s theoretical technical potential to reduce transaction costs in energy service and climate markets and secondly juxtaposes these hypotheses with social/technical/economic systems in which this technology is embedded. By drawing on real life examples, this paper points towards limitations and issues which need to be overcome through both fundamental and applied research to establish how blockchain application in the energy sector may benefit such systems as well as individuals and businesses advocating blockchain. If blockchain’s transaction cost efficiency is to be fully exploited in the ongoing energy system transformation, especially in relation to the growing importance placed on climate markets, more emphasis needs to be placed on inevitable interactions with the 2social/technical/economic systems in which this technology is embedded. This is necessary to ensure accountability and appropriate risk assessments before new and potentially path-dependent socio-technical infrastructures are promoted and implemented as solutions to ‘problems’.